Accounting - What the Numbers Mean, 12e (Marshall)

Chapter 11 Financial Statement Analysis

1) D
2) B
3) C
4) A
5) A
6) C
7) B
8) D
9) C
10) A
11) A
12) C Explanation: 12 × $2.50 = $30.00 compared to 12 × $2.70 = $32.40.
$32.40 − $30.00 = $2.40 increase. Or simply 12 × $0.20 = $2.40 increase.
13) C
14) B
15) B
16) C
17) C Explanation: Debt ratio = Liabilities 25 / (Liabilities 25 + Equity 75) = 25 / 100 = 25%.
Debt/equity ratio = Liabilities 25 / Equity  75 = 33.33%.
18) C
19) A
20) B
21) A
22) D
23) C Explanation: Earnings per share and cash dividends per share for 2019, as reported in
the 2020 annual report, would be restated as though the 3-for-2 stock split in 2020 had
occurred on January 1, 2019. Thus, both of the previously reported per share amounts
for 2019 would have been reduced by a factor of 3/2 (or 1.5) as follows: $1.95 / 1.5 =
$1.30, and $0.30 / 1.5 = $0.20.
24) D
25) B
Explanation:
WC = CA – CL
CA = $8,000 + $30,000 + $22,000 = $60,000. CL = $15,000 + $5,000 = $20,000.
WC = $60,000 - $20,000 = $40,000.
26) B
Explanation:
Current ratio = CA / CL
CA = $8,000 + $30,000 + $22,000 = $60,000. CL = $15,000 + $5,000 = $20,000.
Current ratio = $60,000 / $20,000 = 3.0.

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27) A
Explanation:
Acid-test ratio = (CA – Merchandise inventory) / CL
Numerator = Cash $8,000 + Accounts receivable $22,000 = $30,000.
CL = $15,000 + $5,000 = $20,000.
Acid-test ratio = $30,000 / $20,000 = 1.5.
28) B
Explanation: Cost of goods sold / Average inventories = $210,000 / $60,000 = 3.5 times.
29) D
Explanation:
Inventory at year-end / Average days' cost of goods sold = $70,000 / ($210,000 / 365
days) = $70,000 / 575.3 days = 121.7 days.
30) D
Explanation: Sales / Average accounts receivable = $300,000 / $15,000 = 20.0 times.
31) B
Explanation: Accounts receivable at year-end / Average days' sales = $18,000 /
($300,000 / 365 days) = $18,000 / 821.9 days = 21.9 days.
32) C
Explanation: Net income / Sales = $50,000 / $300,000 = 16.7%.
33) B
Explanation: Sales / Average total assets = $300,000 / $750,000 = 0.4.
34) A
Explanation: Margin × Turnover = 16.7% × 0.4 = 6.7%, or Net income / Average total
assets = $50,000 / $750,000 = 6.7%.
35) B
Explanation: Net income / Average total stockholders' equity = $50,000 / $500,000 =
10.0%.
36) B Explanation: Market price per share / Earnings per share = $70.00 / $5.00 = 14.0.
37) C Explanation: Dividends per share / Earnings per share = $1.40 / $5.00 = 28.0%.
38) B Explanation: Dividends per share / market price per share = $1.40 / $70.00 = 2.0%.
39) B
Explanation: Total liabilities / (Total liabilities + Total stockholders' equity) = Total
liabilities / Total assets = $120,000 / $200,000 = 60.0%.
40) D
Explanation: Total liabilities / Total stockholders' equity = $120,000 / ($200,000 −
$120,000) = $120,000 / $80,000 = 1.5 = 150.0%.
41) C
Explanation: Earnings before interest and taxes / Interest expense = $50,000 / $10,000 =
5.0 times.

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42) The following amounts were reported on the December 31, 2019, balance sheet:

Cash $ 9,000
Accounts receivable   33,000
Common stock   50,000
Wages payable   16,000
Retained earnings   125,000
Land   30,000
Accounts payable   19,000
Bonds payable   110,000
Merchandise inventory   28,000
Buildings and equipment, net of accumulated depreciation   220,000

Required:

(a.) Calculate working capital at December 31, 2019.

(b.) Calculate the current ratio at December 31, 2019.
(c.) Calculate the acid-test ratio at December 31, 2019.

Answer:
Cash $ 9,000
Accounts receivable   33,000
Merchandise inventory   28,000
Total current assets $ 70,000
Accounts payable $ 19,000
Wages payable   16,000
Total current liabilities $ 35,000

(a.) Working capital = CA $70,000 − CL $35,000 $ 35,000  

(b.) Current ratio = CA $70,000 / CL $35,000   2.0
(c.) Acid-test ratio = (CA $70,000 − Inventory $28,000) / CL
$35,000   1.2

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43) The following information was available for the year ended December 31, 2019:

Net sales $ 438,000

Cost of goods sold   350,400
Average accounts receivable for the year   29,200
Accounts receivable at year-end   33,600
Average inventory for the year   116,800
Inventory at year-end   110,400

Required:
(a.) Calculate the inventory turnover for 2019.
(b.) Calculate the number of days' sales in inventory for 2019, using year-end inventories.
(c.) Calculate the accounts receivable turnover for 2019.
(d.) Calculate the number of days' sales in accounts receivable for 2019, using year-end accounts
receivable.

Answer:
(a.)
Inventory turnover = Cost of goods sold / average inventories
= $350,400 / $116,800 = 3.0 times.

(b.)
Number of days' sales in inventory = Inventory at year-end / Average day's cost of goods sold*
= $110,400 / $960 = 115 days.
*Average day's cost of goods sold = Annual cost of goods sold / 365
= $350,400 / 365 = $960

(c.)
Accounts receivable turnover = Sales / average accounts receivable
= $438,000 / $29,200 = 15 times.

(d.)

Number of days' sales in accounts receivable = Accounts receivable at year-end / Average day's
sales*
= $33,600 / $1,200 = 28 days.

*Average day's sales = Annual sales / 365 = $438,000 / 365 = $1,200

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44) The following information was available for the year ended December 31, 2019:

Net income $ 180,000

Average total assets   2,000,000
Dividends per share   1.44
Earnings per share   4.00
Market price per share at year-end   72.00

Required:

(a.) Calculate the price/earnings ratio for 2019.

(b.) Calculate the dividend payout ratio for 2019.
(c.) Calculate the dividend yield for 2019.

Answer:
(a.)
Price/earning ratio = Market price per share / earnings per share
= $72.00 / $4.00 = 18.0.

(b.)
Dividend payout ratio = Dividends per share / earnings per share
= $1.44 / $4.00 = 36%.

(c.)
Dividend yield = Dividends per share / market price per share
= $1.44 / $72.00 = 2%.

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45) The following information was available for the year ended December 31, 2019:

Earnings before interest and taxes (operating income) $ 97,500

Interest expense   15,000
Income tax expense   22,500
Net income   60,000
Total assets at year-end   288,000
Total liabilities at year-end   216,000

Required:

(a.) Calculate the debt ratio at December 31, 2019.

(b.) Calculate the debt/equity ratio at December 31, 2019.
(c.) Calculate the times interest earned for the year ended December 31, 2019.

Answer:
(a.)
Debt ratio = Total liabilities / (Total liabilities & stockholders' equity)
= $216,000 / $288,000* = 75%.

* Total liabilities and stockholders' equity at year-end

= Total assets at year-end, which was given as $288,000.

Total stockholders' equity at year-end

= $288,000 − $216,000 = $72,000

(b.)
Debt/equity ratio = Total liabilities / total stockholders' equity*
= $216,000 / $72,000 = 3.00, or 300%.

* Total stockholders' equity at year-end

= Total assets of $288,000 − total liabilities of $216,000
= $72,000

(c.)
Times interest earned = Earnings before interest and taxes / interest expense = $97,500 / $15,000
= 6.5 times.
Difficulty: 2 Medium
Topic: Financial Leverage Measures
Learning Objective: 11-07 Explain what financial leverage is and why it is significant to
management, creditors, and owners.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

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